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Each year, mutual funds tend to beat the stock market by narrower and narrower margins. If the stock picking management team behind a mutual fund does manage to put in a strong showing one year, it is nearly never able to repeat the trick a second time. Most mutual funds actually manage to underperform the market – their investors end up with lower profits than individual investors get simply by picking the best shares to buy from popular indexes like the FTSE. With almost nothing to show other than undependable performance, mutual funds usually still do charge very high management fees that tend to eat into whatever gains investors make.

What should you, the average investor, do, then? Should you pay a mutual fund a large management fee to pick the best shares to buy for you or should you pick the shares yourself by looking at a popular index and save on the management fees?

The “efficient stock market” theory proposes that beating the markets is impossible

If you’ve done a bit of reading on stock market behavior, you have possibly heard of something called the efficient market hypothesis – an idea floated in the 60s. The hypothesis proposes that investors always act rationally and pick stocks to invest based on the best information available. Since the same information is available to all investors, the market is supposed to arrange itself over time to give the best companies top pricing and the least efficient ones, the cheapest pricing.

This theory calls into question the idea that experts with special knowledge of the markets can pick winners. Since investors do indulge in buying and selling that constantly rearranges the market, the theory would imply that stocks in the market today are already priced the way they should be. There can be no predicting what stocks will go up or down as they are already where they should be.

The reality of the markets is different, though.

How markets act in reality

In practice, many investors base their decisions on insufficient, incorrect or outdated information. Many decide on the best shares to buy based on an investment style rather than purely logical methods. Some have an emotional attachment to stocks from a certain part of the country or a certain industry. Others base their decisions on rumors from the grapevine.

One reason why investors choose investment styles and gut instinct over real information is that there can be too much of it. Investment houses need to put entire departments of highly skilled staff with access to multiple streams of data to process everything necessary to make purely rational decisions about the best shares to buy. Individual investors and small brokerage businesses simply don’t have the time and manpower necessary for such data processing. In the US, one of the central aims of the Sarbanes-Oxley Act of 2002 was to help investors gain better access to information in a way that they could process.

Can you actually pick good shares to buy better than other investors?

Stock picking – the process of studying the market and using insight, statistics and knowledge to find winning stocks better than other investors – worked better when the stock markets were healthier. These days, well-trained stock pickers at major mutual funds fail to beat the results achieved by simple individual investors who simply put their money into stocks featured in the major indexes.

Mutual funds that fail to beat the markets, though, don’t actually perform worse than individual investors. Their management costs are simply so high that they end up with little profit. If you set the costs aside, most mutual funds do manage to beat the major indexes by at least a slim margin. People continue to invest in them, though, because each year, a few funds manage to beat the indexes by a healthy margin. Investors always hope that the fund that they choose may see such luck. Since the winning funds of one year end up losing their touch the following year, it can be very difficult knowing which one to pick.

Individual Savings Accounts (ISAs) are a very popular means of saving and investing money in the United Kingdom. In fact, thousands and thousands of UK citizens over the age of eighteen make hundreds of dollars off their ISA accounts each year.

The primary reason that ISA accounts are so very effective at earning money is that they are all but tax-free. Basically, any money earned from interest or investments from the accounts is not taxed at the end of a tax year.

While cash ISAs are basically just savings accounts that are tax-free, stocks and shares ISAs, the type focused upon here, are more along the lines of an investment that is tax-efficient. A stocks and shares ISA gives you the opportunity to invest your money in different areas, such as open-ended investment companies (OEICs), unit trusts, government bonds, and corporate bonds, with the highest level of tax efficiency possible.

If you are interested in investing in a stocks and shares ISA, there are several things that you must first know. Below is a discussion on the basics of these ISA accounts. Thoroughly understanding these basics will allow you to effectively begin looking at the very best ISAs for you.

Risk of Stocks and Shares ISAs

Before moving on to the complexities of stocks and shares ISAs, it is important to point out their primary difference from cash ISAs: risk.

Simply put, stocks and shares ISAs are much riskier than their cash counterparts. This is largely because investments, unlike set interest rates, can go either up or down. If you don’t make a solid investment, you might lose money rather than gain money. However risky stocks and shares ISAs may be the potential for a high payoff is by and far greater than with a cash ISA.

How Much Can You Invest?

One of the first questions that many people have regarding stocks and shares ISAs is how much you can invest.

You are allowed to invest up to £11,520 per tax year in ISAs in general. This is between both the stocks and shares version and the cash version. You may decide to invest this all in a stocks and shares ISA or split the allowance up between the two, putting up to half of it into a cash ISA.

Many people decide to split their allowance straight down the middle. They do this by investing £5,760 in a cash ISA and the other £5,760 in a stocks and shares ISA. This method of saving/investing has the benefit of being both safe and rewarding.

What Are the Tax Benefits of a Stocks and Shares ISA?

The best ISAs have solid tax benefits. In fact, these tax advantages are one of the main reasons to invest in a stocks and shares ISA in the first place.

It is important to point out that using your ISA for a share-based investment, like an OEIC, will most likely only give you a tax break if you actually make money from the investments. In other words, an ISA will benefit you if you would normally be required to pay capital gains taxes on the investments.

With a stocks and shares ISA, you have an allowance of £10,900 for capital gains. Make less than this off of an ISA investment and you won’t have to pay any taxes on it at all.

Investing in investments with dividends is a different story. Normally, dividends investments in the United Kingdom require you to pay a 32.5pc tax per year (or 37.5pc for additional rate taxpayers). Invest in dividends through an ISA and you will only have to pay 10% on these dividends.

Are There Any Related Charges?

It is essential to note that there are a handful of related charges when you invest in a stocks and shares ISA.

Chief among these is commission that is used to pay financial advisors. This commission, however, has been banned in many cases. ISA charges might also include fees to cover admin costs and fees to make payments to fund managers. Simply put, charges for ISA accounts vary depending on your individual investments, just like they would for an investment outside of an ISA.

There is simply no denying that investing in an Individual Savings Account, whether a stocks and shares ISA or a cash ISA, is an excellent way to earn back additional money.

Before making any moves, it is essential that you understand the nature of the account you wish to put your hard-earned money into. The information regarding stocks and shares ISAs discussed above will help you find the best ISAs possible and will ensure that your money is used as effectively as possible.

Trying to figure out how to maximise your cash ISA (Individual Saving Account) allowance should take place at the beginning of the year, rather than waiting until the last minute. This is particularly true for individuals who do not have easily accessible lump sums of cash at their disposal at any given time. If you want to get the most out of this type of savings strategy, then you need to learn how to optimise the opportunities it provides.

As you know, your cash ISA allowance is regulated by certain rules that specify exactly how much you can put into this type of savings account over the course of a single year. As long as you follow these guidelines and the suggestions included here, you should be able to maximise your profits quite nicely.

Maximise Your Full Cash ISA Allowance Each Year

Perhaps the most important reason to maximise on the amount of money that you contribute each year is the fact that you’ll end up with more money at the end of the tax year. It’s only logical that the more you put into it, the larger the sum of cash you accumulate will be.

One of the other reasons that you should try to put in the full tax allowance is that you don’t have to worry about paying taxes on your contributions. Unlike a regular savings account, all of the interest that you earn is tax-free, so you get to keep all of it. Again, the more you put into it, the greater your savings will be.

Since your returns are tax-free, it makes sense to put in as much as you can afford up to your full limit. For tax year 2013/2014, UK investors can place as much as £5,760 into their accounts. Of course, the amount for a junior account is less, and it is valued at £3,720. You should always use your full cash ISA allowance because you can’t rollover any unused amounts to the next year’s account. Take advantage of full tax allowance by putting in whatever you can afford whenever you can.

You should make sure that you get your money to work for you by putting it in as early in the year as possible. The earlier that you deposit your money, the sooner it will begin earning interest for you. If you wait until two months before the end of the tax year, your money is only going to earn interest during those two months. However, if you put it into the account during the first month, your money will earn interest for the full twelve months. If you are looking to earn money, then it only makes good sense to start as early as you can.

Start Now and Watch Your Money Grow

If you haven’t yet started to save by opening a cash ISA, it isn’t too late. You can begin whenever you like, but the sooner you start, the better your chances are to realise your full allowance. Plus, you don’t need to have access to a lot of money when you first begin to save. In fact, it is easy to get started, since you can open an account with a single pound. Yes, just one pound will provide access to an ISA of your own. So, if you start now with one pound and continue to deposit additional sums of cash, you will be able to watch your money grow now instead of waiting to accumulate a large sum to open up an account.

Top Off Regularly and Reach Your Full Cash Allowance Sooner

If you haven’t already been doing so, it is important to top off your cash ISA regularly if you want to have hopes of maximizing on your allowance. You should simply develop a regular habit of putting money into the account as regularly as you can. Don’t set your goal too high or you will experience disappointment far too often. Instead, create small, realistic goals that can help you to reach your larger goal of putting in the full allowable amount of £5,760 for 2013/2014.

If you are having difficulty getting yourself to make regular deposits to top off your account, why not consider setting up a standing order from your regular account? You simply select the amount that you want to transfer from your regular account to your cash ISA account and set it up so that the transfer repeats itself every month.